The Aig Crisis
Pre-September 2008: The AIG Crisis
Over the years, AIG built upon its premier global franchises in life and general insurance by expanding into a range of financial services businesses. One of these, created in 1987, was AIG Financial Products Corp. (AIGFP), a company that engaged as principal in a wide variety of financial transactions for a global client base. In 1998, AIGFP began to sell credit default swaps to other financial institutions to protect against the default of certain securities. At the time, many of these securities were rated AAA, the highest rating possible. However, in late 2007, as the U.S. residential mortgage market began to deteriorate, the valuation of these securities declined severely. As a result, AIG recorded significant unrealized market valuation losses, especially on AIGFP’s credit default swap portfolio, which led to substantial cash requirements.
At the same time, AIG reported large unrealized losses in its securities lending program. Through this program, AIG made short-term loans of certain securities it owned to generate revenues by investing in high-grade residential mortgage backed securities. These and other AIG real estate-related investments suffered sharp decline in fair value as well.
It is important to reiterate that throughout the crisis, AIG’s insurance businesses were—and continue to be—healthy and well capitalized. The losses that occurred as a result of AIGFP’s actions have no direct impact on AIG policyholders. AIG’s insurance companies are closely regulated, and their reserves are protected with adequate assets to meet policyholder obligations.
The collapse of respected financial institutions such as Bear Stearns and Lehman Brothers sent shock waves throughout the world economy. The crises at the U.S.-sponsored mortgage companies Fannie Mae and Freddie Mac added to the financial disruption. Credit markets deteriorated rapidly, making it virtually impossible to access capital. In September, AIG’s credit ratings
Over the years, AIG built upon its premier global franchises in life and general insurance by expanding into a range of financial services businesses. One of these, created in 1987, was AIG Financial Products Corp. (AIGFP), a company that engaged as principal in a wide variety of financial transactions for a global client base. In 1998, AIGFP began to sell credit default swaps to other financial institutions to protect against the default of certain securities. At the time, many of these securities were rated AAA, the highest rating possible. However, in late 2007, as the U.S. residential mortgage market began to deteriorate, the valuation of these securities declined severely. As a result, AIG recorded significant unrealized market valuation losses, especially on AIGFP’s credit default swap portfolio, which led to substantial cash requirements.
At the same time, AIG reported large unrealized losses in its securities lending program. Through this program, AIG made short-term loans of certain securities it owned to generate revenues by investing in high-grade residential mortgage backed securities. These and other AIG real estate-related investments suffered sharp decline in fair value as well.
It is important to reiterate that throughout the crisis, AIG’s insurance businesses were—and continue to be—healthy and well capitalized. The losses that occurred as a result of AIGFP’s actions have no direct impact on AIG policyholders. AIG’s insurance companies are closely regulated, and their reserves are protected with adequate assets to meet policyholder obligations.
The collapse of respected financial institutions such as Bear Stearns and Lehman Brothers sent shock waves throughout the world economy. The crises at the U.S.-sponsored mortgage companies Fannie Mae and Freddie Mac added to the financial disruption. Credit markets deteriorated rapidly, making it virtually impossible to access capital. In September, AIG’s credit ratings